Author: Jessica Marquez

    WM: In June, Johnson & Johnson announced the $16.6 billion acquisition of Pfizer’s consumer health care business. How early on did you get involved in the deal?

    Foster-Cheek: Clearly [I’m involved] on the due diligence side. Even though I am head of HR, I am also on the executive committee as a corporate officer. As we consider large-scale acquisitions the size of Pfizer, I would be involved in the upfront work before we make the decision to acquire the company. That early work around the financial analysis and valuation is work that occurs within the executive committee.

    Further down, I sit on the steering committee for the Pfizer consumer health care acquisition. The steering committee has accountability for the high-level future organizational design and really ensuring that integration runs well. I have an HR leader for the consumer business of Johnson & Johnson who oversees the acquisition in terms of the organizational design.

    WM: At what point do you start assessing talent before an acquisition?

    Foster-Cheek: Immediately. That is part of the assessment of the acquisition. We think about things like “Does this give us access to growth markets that we aren’t currently in? What is the reputation in the marketplace of the talent of the organization?” And you can do that by looking at the business performance of the talent. I think about what is going to be required to run the future organization, and that is something I do with the HR leaders of the business.

    With the Pfizer business, I have a little bit of insight, since I worked at Pfizer for 13 years. Part of the valuation is the talent we are going to get. Literally from the minute we ink the deal, we do as much as we can under Federal Trade Commission rules, since we are still competitors until the deal closes. We use any public information that we have access to and use that to do early integration planning.

    WM: How important is that?

    Foster-Cheek: We do so many acquisitions, and our historic growth has been through acquisitions. This Pfizer acquisition will be the largest in our history. You need to have your HR professionals in from the very beginning because that is how you know you are putting together processes to allow the organization to function properly.

Workforce Management, October 23, 2006, p. 21 — Subscribe Now!

    WM: In June, Johnson & Johnson announced the $16.6 billion acquisition of Pfizer’s consumer health care business. How early on did you get involved in the deal?

    Foster-Cheek: Clearly [I’m involved] on the due diligence side. Even though I am head of HR, I am also on the executive committee as a corporate officer. As we consider large-scale acquisitions the size of Pfizer, I would be involved in the upfront work before we make the decision to acquire the company. That early work around the financial analysis and valuation is work that occurs within the executive committee.

    Further down, I sit on the steering committee for the Pfizer consumer health care acquisition. The steering committee has accountability for the high-level future organizational design and really ensuring that integration runs well. I have an HR leader for the consumer business of Johnson & Johnson who oversees the acquisition in terms of the organizational design.

    WM: At what point do you start assessing talent before an acquisition?

    Foster-Cheek: Immediately. That is part of the assessment of the acquisition. We think about things like “Does this give us access to growth markets that we aren’t currently in? What is the reputation in the marketplace of the talent of the organization?” And you can do that by looking at the business performance of the talent. I think about what is going to be required to run the future organization, and that is something I do with the HR leaders of the business.

    With the Pfizer business, I have a little bit of insight, since I worked at Pfizer for 13 years. Part of the valuation is the talent we are going to get. Literally from the minute we ink the deal, we do as much as we can under Federal Trade Commission rules, since we are still competitors until the deal closes. We use any public information that we have access to and use that to do early integration planning.

    WM: How important is that?

    Foster-Cheek: We do so many acquisitions, and our historic growth has been through acquisitions. This Pfizer acquisition will be the largest in our history. You need to have your HR professionals in from the very beginning because that is how you know you are putting together processes to allow the organization to function properly.

Workforce Management, October 23, 2006, p. 21 — Subscribe Now!

Sue Hagen admits she had a few concerns about how going private would affect her company. As senior vice president of human resources at Dole Food Co., she was worried it would be harder to recruit and retain talent without the prestige of being a publicly traded company.

But chairman David Murdock’s reasons for going private were compelling. It was his dream to leave a legacy by refocusing on nutritional education and addressing obesity in the U.S.

To do so effectively, it would mean having a longer-term focus than a public company normally has, Hagen says.

“His vision didn’t exactly fit into a quarterly newsletter to shareholders,” she says. “These things wouldn’t have direct payback from a financial point of view, but it was his passion in life to do this.”

In March 2002, Murdock bought the 76 percent of common stock he did not already own, making Westlake Village, California-based Dole a private company. Murdock spent $2.5 billion, or $33.50 per share, to buy the Dole stock, which was then trading at $29.98 on the New York Stock Exchange. He also took on the company’s debt.

In the past few years an increasing number of publicly traded companies have gone private. The first wave hit in 2003 as a result of the Sarbanes-Oxley Act of 2002, which created a slew of costly compliance procedures for public companies in response to major accounting scandals at Enron and Worldcom. In 2003, 127 public companies went private, up from 92 in 1999, according to CapitalIQ, a New York-based provider of financial services information. The trend steadied in 2005, with 95 companies going private, but appears to be picking up this year. As of July 30, there had already been 86 of these transactions announced.

The reason for the acceleration is an increasing appetite among private equity investors. In the past few months, private investors have taken over a number of high-profile public companies, including hospital giant HCA and Philadelphia-based Aramark.

“What’s driving this recent wave is that private equity is returning more than the stock market,” says Robert Keiser, senior research manager at Thomson Financial. Overall, the U.S. Private Equity Index, tracked by Cambridge Associates, gained 27 percent last year, compared with a 5 percent return for the Standard & Poor’s 500.

But executives at public companies being wooed by private equity investors have a lot of workforce management issues to think about before signing a deal, observers say. And more companies are thinking through these issues, says Hector Calzada, senior vice president at Houlihan Lokey Howard & Zukin, a Los Angeles-based investment banking firm.

“In the late ’90s, a lot of private investors came in and took a slash-and-burn approach, thinking they could do the same work with less people,” he says. “But after the tech boom and bust, more of these financial sponsors realize the sacrifice they make when they use the thinnest workforce possible. They are looking more long term.”

Public companies that go private have to think about the cultural issues the change evokes, as well as create a plan to communicate the changes to employees. On top of that, they often need to devise new ways to recruit and compensate workers.

“You have to have a good sense of your organization,” says Mark Suwyn, chairman and CEO of NewPage Corp., a Dayton, Ohio-based paper company. As an associate with New York private equity firm Cerberus Capital Management, Suwyn helped take NewPage private in May 2005.

Communication
Communicating with employees about what going private means was the biggest challenge for Hagen at Dole, given the size of its workforce. Dole has 60,000 employees in 90 countries speaking 13 languages.

“Even short, straightforward messages are complex and involved to communicate,” Hagen says.

For the two months after the change was announced, Hagen and her eight-person team worked with department heads to conduct a mass communication campaign that included small and large group meetings, e-mails, newsletters and the company’s intranet. Since only one-tenth of Dole employees work at computers on the job, Dole made sure its managers understood the change and communicated it to employees. “Managers would go out into the field and explain it to workers,” Hagen says.

Dole’s message centered on what it meant to be a private company instead of a public one, and reassured employees their benefits and compensation would not change, Hagen says.

Repetition was key, she says. After the first couple of months, Hagen and her team made sure to repeat the message so that employees felt at peace with the changes.

A company shouldn’t underestimate employee apprehension when it announces it’s going private, Suwyn says. “There are always lots of rumors about how horrible it’s going to be after the change is made,” he says. “It can be debilitating and employers need to address it.”

Suwyn knows something about how to bring those worries to the surface. At Louisiana Pacific, where he was CEO from 1996 to 2004, Suwyn developed a method to address employee concerns and make them feel like their voices were being heard. He made it a point to visit various mills and offices annually and invite employees to share their concerns and grievances, with the understanding that he was there to listen to them.

After each worker spoke up, Suwyn would thank the person and say, “Let me make sure I understand what you are saying,” and then repeat back the employee’s concerns.

“It’s an exercise to get employees to bring tough issues to the table,” he says. In many cases, supervisors would hear their employees’ grievances and respond immediately, or sometimes Suwyn would address them. Such interaction fosters employee buy-in, he says.

Suwyn has continued to use this technique effectively, both as an associate with Cerberus and more recently to help NewPage employees feel more comfortable with him as CEO of a now-private company.

Simply explaining to employees the benefits of being a private company also helps.

“It would behoove the HR executives to think about selling the employees on the positives of this kind of change,” says Jack Lord, a partner in the Orlando, Florida, office of Foley & Lardner. “It can be particularly attractive to entrepreneurial-spirited employees if you tell them that now the company can do what it wants without getting approval from shareholders,” he says.

Many barriers are removed when a company goes private, making it easier to get things done, says Jamie Hale, a consultant with Watson Wyatt Worldwide, which went public in 2000. “The ability to share information within the organization was much easier when we were private,” she says.

Taking away options
At Dole, changing compensation benefits wasn’t a big issue, since only a handful of executives had stock options. Those options were exchanged for cash. Then Hagen and her team created a long-term cash incentive program to compensate those executives.

But for companies that rely heavily on stock option grants, experts say going private can be a challenge. Companies must find a comparable substitute and communicate to employees how the new incentive plan works, says Paul Sanchez, global director for organization research and effectiveness at Mercer Human Resource Consulting.

There are ways companies can replace stock options and still get the same benefits, he says. Employers can offer performance-based cash grants that employees receive after the company achieves specific goals. Another option is creating a variable compensation model where employees can vest over time.

The key to offering such alternatives, not surprisingly, is in the communication, Sanchez says.

Also, cash compensation is more expensive, and companies need to be prepared for that, Lord says. “A stock option is a lot cheaper than one dollar,” he says.

The bigger implication of removing options is how it affects morale, observers say. “Employers need to make it clear that they don’t value their employees less and they are going to continue to pay them accordingly,” Lord says.

Cultural issues
Executives also need to consider the cultural implications of going private, particularly since they won’t be under the same level of public scrutiny anymore.

“Private companies can find themselves in a heap of trouble by not following the same set of rules they did when they were public,” says Calzada at Houlihan Lokey Howard & Zukin.

It often requires more frequent communication and enforcement of compliance codes to “establish a culture of ethics,” he says.

In situations where a company is being taken over by private investors, management needs to make sure there is a sense of trust in the leaders of the organization, whether they are new or not. “HR managers need to understand the roles of executives in the new organization and communicate with employees,” says Hale at Watson Wyatt.

Management’s credibility can sometimes take a hit when private investors take over an organization. Even though they pledge to keep existing managers, employees may perceive that their leaders don’t have any control anymore and thus lose faith in them, she says. “If employees feel their leaders have lost credibility, it will affect their engagement and could increase turnover.”

Hagen says there weren’t any cultural ramifications for going private at Dole. Her concern about whether employees would view the company as less prestigious after becoming private also appears unfounded, she says.

“Recruiting and retaining employees has not been affected,” she says. When interviewing candidates, she talks about the things Dole is doing to encourage people to be healthy. She also emphasizes the decentralized structure of the organization, which allows employees to act independently.

“Today we have a different story to tell that still attracts people to Dole,” she says.

When the Financial Accounting Standards Board in 2005 began requiring companies to list their stock option grants as expenses, many predicted the imminent death of such perks.

    But a glance at the 30 highest-paid HR executives at publicly traded companies in 2005 proves that the death of option grants was greatly exaggerated.

    According to the list, which was compiled for Workforce Management by New York-based consultancy ExecPay, 21 of the 30 highest-paid HR executives received options.

    “Options aren’t going away. They make way too much sense,” says Alan Johnson of Johnson Associates, a New York-based executive compensation consultancy.

    The list, which is based on proxy filings with the Securities and Exchange Commission of the 2,000 largest companies as of July 15, shows that although more companies are offering restricted stock to executives, many are still offering option grants. In fact, eight HR executives on the list received stock option grants and no restricted stock.

    “Stock option grants are the easiest way for companies to motivate executives to work toward getting the stock price higher,” Johnson says. The problem with restricted stock is that it is usually granted to employees for just staying with the company, he says. “Employees just get restricted stock for breathing.”

    Companies can align restricted stock with performance goals, but it can be an onerous task, Johnson says. “It’s often hard to pick the performance goals to base it on, and companies’ strategies are often changing, so those goals have to be revisited,” he says.

    Crawford W. Beveridge, chief human resources officer at Sun Microsystems, received the most option grants among those on the list, getting 400,000 shares. Second is Edward A. Evans, executive vice president and chief personnel officer of Allied Waste Industries, who received 150,000 shares. But Beveridge and Evans made $1.59 million and $1.65 million, respectively, in total compensation—putting them toward the bottom of the list of the highest-paid HR execs in 2005.

    “This begs the question of what is the real value of an executive’s compensation package,” says Andrew Oelbaum, president of ExecPay. The question is up for debate, particularly since the value of the options is determined by whatever formula the company decides to use, he says.

    But top executives like Evans at Allied Waste say stock options provide them with a greater sense of control over their compensation. “Having a variable compensation component, like stock option grants, gives people the ability to create incredible value for themselves,” Evans says. “Stock options make a lot of sense in publicly traded companies, and I believe you will see more of it.”

    The top earner on this year’s list is Dennis Donovan, executive vice president of human resources at Home Depot, marking the second consecutive year he has ranked No. 1.

    Donovan’s $6.6 million raised some eyebrows given the public outrage regarding the compensation of his boss, CEO Robert Nardelli. The chief executive has been the source of much controversy at Home Depot because he has made more than $245 million in compensation in his five years as CEO, a period during which the company’s stock declined 12 percent.

    But it’s times like these that companies need a good HR person to make sure the organization continues to attract and retain talent, says Bill Coleman, senior vice president of compensation at Salary.com. “My feeling is that he is earning his keep,” he says of Donovan.

    Given that service is a key component of a customer’s experience at Home Depot, it makes sense that the company would put a premium on its head of HR, says Joe Vocino, principal consultant in Mercer Human Resource Consulting’s performance measurement and rewards practice.

    The companies on this year’s list are those in need of high-quality talent, he says. Energy, construction and manufacturing organizations were dominant. That makes sense because these companies tend to not only be labor intensive, but many have a large union presence, which raises the premium of their HR leaders, Vocino says.

    Overall, the number of HR executives landing among the five highest-paid executives at large companies has nearly doubled since 1999, from 13 to 25, according to Mercer.

    Consultants expect this trend to continue, particularly as companies continue grappling with issues related to pension costs, health care, an aging workforce and what companies perceive as a shortage of top talent.

    “There is no other discipline that is growing among the top five rank the same way that HR is,” Vocino says. “This trend will only continue.”

Workforce Management, September 11, 2006, p. 29 — Subscribe Now!

When most human resources executives talk about their achievements, they might describe a new talent management system they imple- mented or a compensation program they designed. Dennis Donovan is proud of his work in these areas as well.

    But when asked which past accomplishments he is most proud of, Donovan talks about how he worked closely with other executives at his former employers General Electric and Raytheon to grow the companies.

    He describes how, as vice president of human resources at GE Power Systems, he worked with Robert Nardelli, who was then president and CEO of the division, helping to “take a $5 billion company to $20 billion in five years” through acquisitions and organic growth.

    “We moved GE from a power delivery company to an energy services company,” he says. “That transformation expanded our scope of business and the types of companies we would acquire.”

    When Donovan talks about his time as senior vice president of human resources at Raytheon, he describes how he and the management team “redefined the metrics being used” to assess the entire business.

    In other words, he sounds more like a CEO than a head of human resources.

    And that’s why Donovan, executive vice president of human resources at Home Depot, is the highest-paid HR executive of a publicly traded company in the country—making $6.6 million in 2005.

    Unlike many HR executives who feel left out of strategic business discussions, Donovan acts as the right-hand man to Nardelli, CEO of Home Depot, who brought Donovan on in 2001.

    Donovan’s responsibilities cover all aspects of workforce management for Home Depot’s more than 355,000 associates. Since he arrived, Donovan has established huge recruiting partnerships to make sure the home improvement retailer has ongoing access to talent. For example, in February 2004, Home Depot signed an agreement with AARP to attract and retain older workers.

    Also in 2004, he formed a partnership with the Department of Defense, the Department of Labor and the Department of Veterans Affairs to start Operation Career Front, a program to provide career opportunities to military personnel. Although Home Depot won’t say how many service members have been hired under that particular program, it says it has hired 43,000 veterans since 2003.

    Then last year, Home Depot formed hiring alliances with four national Hispanic organizations: the Aspira Association, the Hispanic Association of College and Universities, the National Council of La Raza and SER-Jobs for Progress National. These partnerships have helped the company continually reduce turnover during the past five years, although Home Depot won’t disclose exact figures.

    For Donovan, these hiring partnerships not only provide Home Depot with sources of talent, but they allow the retailer to make other business inroads. For example, in December 2004 the company established a merchandising deal with AARP that revolved around in-store clinics, grandparent/ grandchild workshops in stores and other marketing materials focused on older customers.

    “We are leveraging HR for our other businesses,” Donovan says.

    But his work is not done. Last month, Home Depot announced that sales at stores open at least a year fell by two-tenths of a percent, the first such decline in more than three years. The company also warned that profit and sales for the year would be at the low end of its forecasts.

    Donovan declined to talk about his compensation, but he did recently speak to Workforce Management staff writer Jessica Marquez about his views on the role of HR, what it’s like to work with Nardelli and the ongoing challenges that Home Depot faces.

    Workforce Management: How did Bob Nardelli approach you for the job at Home Depot?
    Dennis Donovan: Bob and I stayed close even after I left GE. After he didn’t get Jack Welch’s job as CEO, we talked a lot about what he would do next. When he landed at Home Depot, the HR position had been open for some time. Bob was always someone who recognized the value of HR within an organization. And so he came to me about it, and I said no. Things were going well in Boston at Raytheon, so I gave him some names of people I thought were good. And we continued to talk on the phone and kept in touch.

    Then a few weeks later, I was on vacation with my wife in Puerto Rico and I decided to give him a call to see how he was doing. It was late on a Friday night and I didn’t have his number with me, so I was going to call his office and see if someone in security could give me his home phone number. But he answered the phone. And I said, “What’re you doing there this late?” And his reply was, “Your job.” That’s when I knew I had to help him.

    WM: What were your first challenges when you started at Home Depot?
    Donovan: On my first day, Bob said three things to me. First, he said, “Thanks for coming.” Second, he said, “You have to pitch the executive committee today, I forgot to tell you.” When I asked him what I was supposed to say, he responded, “You have between now and 1 p.m. to figure it out.”

    The third thing he told me was that the company had been talking about the need to centralize the merchandising business, and that I had 90 days to do it. So I quickly put together a PowerPoint presentation for the board about what I hoped to do at Home Depot. I talked about how this was a company that needed to significantly transform. The business had been pretty decentralized and autonomous, and we needed to change that to get scale and continue to grow.

    When that was done, we created a cross-functional team of eight to 10 people throughout the company to come up with a plan for the merchandising business.

    WM: Up until that point, Home Depot’s merchandising business was made up of nine divisional offices, each of which operated independently and had different pricing agreements with suppliers. Centralizing this business made sense, but how did you get the heads of all these divisions to agree to how it should be done?
    Donovan: We had to explain the inefficiencies of what was going on and listen to their ideas and work to get their support. Getting the acceptance of the group was critical.

    We spent the first three months looking at the roles and responsibilities and what it would take to do this massive consolidation. We realized it was going to be the biggest change in the history of the company. I announced that I wanted to get everyone together in one room. So after that pre-work, we set a date—July 30, 2001—for what we called Super Saturday, where the leadership team and all of the presidents of each of the divisions, along with their heads of HR and some finance and organizational people, sat down in a room to create the new business. It was 60 people in total. And our goal was to have the new division established by the end of the day. We hoped by having them all participate, we could get them to commit to the new business model.

    WM: That sounds terrifying. How did it go?
    Donovan: It started at 8 a.m. and lasted until 3:30—it actually ended a half an hour early. I told them everything had to be decided that day because we were announcing the new business the following Monday. The idea was to move quickly and with agility. That is our competitive advantage. The first three hours were spent getting everyone to agree on how the business would function.

    Then we started building the division. We had more than 100 résumés of Home Depot associates. On the back wall of the room, we posted their names on a board. On the front was our new organizational chart of what the new merchandising organization would be. On the side wall was the new field structure. We came up with three names for each position on the front wall and then discussed who the best person was for that job. Once we decided on a person, whoever knew that person best picked up the phone and called them to offer the job. We had pre-approved compensation packages so that we could overnight them their compensation packages. Once they accepted, we put a big gold star next to their name. Within three and a half hours we had appointed 29 new officers. Hundreds of field positions were filled the same way. The whole day was a mix between a love-in and a food fight.

    WM: Why was speed so essential with that process?
    Donovan: Super Saturday is an illustration of how you can use innovation and speed to win the acceptance of people who participate in the process. Whenever you are looking at large-scale change you need a structure for that change and a process in place. Today, whenever we go through a restructuring, we go through a similar type of process, although we don’t call it Super Saturday. I knew this approach was successful when a long-term Home Depot person said to me, “It would have taken us a year to come to this discussion and make these decisions.”

    WM: How does your approach to workforce management differ from a more traditional approach?
    Donovan: If people ask me what does HR do, I say there are two basic things. One is you put in a process for change and you populate that process with high-impact initiatives. Some people have titles like chief human resources officer or chief human capital officer. I think of it as a chief change officer. HR is integral to bringing on change and transforming the business according to various metrics.

    When I was at GE, I would spend time with GE customers and ask them questions about what they really do in their jobs. And eventually they would say that their job was to bring on successful change within their organizations. But when I asked them if they had a process in place to implement that change, they would all say no.

    It doesn’t matter what kind of organization you have. Whenever there is a change, anxiety is normally high. People want to know what you want them doing. You need to get in front of your people and show them the plan for your design. It’s like when you build a house, you want to show the people doing the building what the layout of the foundation is going to be. The most important part of change architecture is letting people connect the dots.

    Shortly after I started at Home Depot, I got in front of every store manager and district manager to cover the change management process so that people could visually see how this would all come together. The creation of the merchandising business went so smoothly because we had that buy-in.

    WM: How do you know when an organization needs to change?
    Donovan: At Home Depot, change isn’t dictated by me or Nardelli. We need to look at the industry and at what our competitors and suppliers are doing. When we were making all sorts of changes to centralize the organization, at one point someone asked Nardelli if we could take a few things slower to make sure that everything worked out. His response was, “Sure, I’ll call Lowe’s and ask them to slow down.”

    The other part of the change equation is sharing metrics. For HR, that means creating a performance management system that is aligned around the organization’s goals. How do you get accountability in an organization? That’s often where organizations fall down. You can’t achieve accountability without metrics.

    WM: Some of Home Depot’s critics might argue that there isn’t real accountability at Home Depot. They point to Nardelli’s compensation as a sign of this. Nardelli has made more than $245 million in compensation in his five years as CEO, as the company’s stock declined 12 percent. How do you justify that?
    Donovan: This is a company that in five years—five very tough years given 9/11 and everything else that has gone on—has moved from $45 billion to $81 billion. It took 22 years to get to $45 billion, and in less than six years we have doubled the size of the company (based on an estimate of reaching $90 billion this year).

    We have more than doubled earnings per share. Dividends to share owners have jumped to 60 cents from 15 cents, and this is a business that needed major transformation. We have taken store count from 1,200 to over 2,200, and we have created a building supply company with over 900 branch offices. We have done 38 acquisitions in the last two years. Around 90 percent of acquisitions fail to meet pro forma, but all 38 of ours have met or exceeded pro forma. We have added over 120,000 new net jobs to Home Depot. So when critics talk about lack of accountability, we say, “Let’s look at the results.”

    WM: What are you doing as head of HR to help Home Depot get into the building supply business?
    Donovan: I have a lot of my team working on our inorganic growth. Most HR organizations get involved in acquisitions in the later stage, but we are involved as part of the pre-due diligence. That’s important because we can help shape the targets. In March, we made our biggest acquisition yet with the purchase of Hughes Supply, a $6 billion company. The first thing we did there was we went to Orlando, where Hughes is based, and met with the CEO and chief financial officer and talked about talent, because talent is going to be the business. We looked at the board structure, we looked at all of the staffing processes and performance management as well as their reward structures. We looked at how they handled their HR management and what they do with career development and learning systems. Then we moved quickly and started doing assessments of the talent. Determining where the synergies are is crucial to making all of our acquisitions successful.

    WM: What is your greatest challenge today?
    Donovan: We can never get enough talent into the organization. I am constantly trying to enhance the talent base within Home Depot. I want to move faster. I brought in 900 HR professionals from April 2001 through January 2002. I hired 800 of those within 12 weeks. We move very quickly, but I wished I moved faster.

Workforce Management, September 11, 2006, pp. 16-18 — Subscribe Now!

Wal-Mart’s plan to expand its HR operations to dedicate staff to each of its regions may be a step in the right direction, but some observers hope it’s just the first of more measures to come. Providing more HR support and training for its store managers is something Wal-Mart has needed to do for some time, critics say.

    The Bentonville, Arkansas, firm has based its culture around founder Sam Walton’s belief that anything associated with big corporate culture, including HR training, would lead to “big bureaucracy,” says Jocelyn Larkin, an attorney with the Impact Fund, the organization representing 1.5 million women in a gender discrimination suit against Wal-Mart.

    By not providing any guidance or HR standards, store managers were left to their own devices, she says.

    “You have someone with often a high school education who is horrifically overworked and without any training on how to make hiring decisions,” she says. “That’s a prescription for disaster.”

    Larkin says she would applaud any efforts Wal-Mart makes, but “the proof is in the pudding.”

    The gender discrimination suit brought against Wal-Mart won class-action certification in June 2004, but Wal-Mart appealed it in August 2005 to the 9th U.S. Circuit Court of Appeals in San Francisco. Larkin says she expects a decision any day.

    Getting HR people out in the field may help employee morale, says Susan Wehrley, an HR consultant in Pewaukee, Wisconsin. Soliciting employee feedback often makes workers feel more a part of an organization, but following up on that feedback is even more important, she says.

    Officials at Wal-Mart Watch and Wake-Up Wal-Mart, two union-backed groups critical of the retailer, agree that it’s going to take a lot more to address their concerns. Specifically, both groups have called on Wal-Mart to increase wages, which average $9.68 an hour for full-time employees.

    This makes it difficult for employees to afford the health care deductibles of Wal-Mart’s plan, which are $1,000 per person with a $3,000 maximum, says Chris Kofinis, a spokesman for WakeUpWal-Mart.com.

    “The percentage of workers who are covered by insurance by Wal-Mart has actually fallen over the past year” despite the changes the retailer made to its health care plan, he says. Last year, 54 percent of Wal-Mart’s workers were covered, compared with 48 percent this year, he says.

    “It’s pretty simple what Wal-Mart needs to do,” Kofinis says. “They need to pay workers better.”

    Perhaps Wal-Mart was listening. It announced last week that it was raising the starting pay rate at about a third of its stores.

Workforce Management, August 14, 2006, p. 30 — Subscribe Now!

For the past few years, Wal-Mart has been operating under a microscope. Some of the scrutiny has focused on how the Bentonville, Arkansas, retailer locates its stores, with charges that it is bent on driving out smaller businesses. Its hard-nosed drive for lower-cost goods, and the effect that has had on both foreign workers and domestic suppliers, has been another area of inquiry. But most of the attention has focused on how Wal-Mart deals with its own employees.

    Wal-Mart has been the target of class-action lawsuits alleging that the company engaged in sexual discrimination, sexual harassment and wage-and-hour violations, the last by denying employees meal breaks and overtime pay.

    The labor movement has become increasingly active in criticizing the employment policies of the world’s largest retailer. Last year, two union-funded groups formed, Wal-Mart Watch and WakeUpWal­Mart.com, both of which have been active with protests and public campaigns urging reforms in Wal-Mart’s employment and business practices.

    And then in January, the Maryland Legislature passed what has become known as “the Wal-Mart bill,” which forces employers with more than 10,000 workers to devote at least 8 percent of payroll to health care benefits. Last month, however, a federal judge in Baltimore ruled that the measure violated the federal ERISA law, a decision that is being appealed by Maryland’s attorney general.

    Also last month, Chicago passed an ordinance aimed at chains like Wal-Mart. It requires “big box” retailers, whose stores are 90,000 square feet or more and who generate $1 billion in annual sales, to pay workers a minimum wage of $10 an hour and $3 per hour in benefits by 2010. Wal-Mart has been planning to open its first store in the city this year.

    The retailer seems to have gotten smarter about how it responds to such salvos. A year ago, company executives would say that they were just being targeted because they’re the biggest retail chain in the country and leave it at that.

    Today, however, Wal-Mart seems to recognize that the best way to defend itself is to make sure its employees are happy. To that end, the retailer has embarked on a major workforce management reorganization. The company is hiring more than 300 human resources managers to work in the field, instead of just having 100 executives in its headquarters oversee everything, says Sue Oliver, senior vice president of the Wal-Mart Stores Division.

    Oliver joined Wal-Mart in April 2004. She had previously been at American Airlines, where she was head of human relations. Oliver reports to Susan Chambers, executive vice president of risk management and benefits. Oliver is helping to oversee the new workforce management strategy.

    Oliver says once its HR staff is in place, Wal-Mart hopes to be able to better communicate with its associates and better engage them in the business goals of the company. If Wal-Mart can communicate better with its associates and make sure it is hiring and retaining the best people, it will also be able to stay ahead of customer demand and trends as well, she says.

    “We have never been resistant to change, but we are now embracing change as necessary because our customers are changing,” she says.

    Oliver recently spoke to Workforce Management staff writer Jessica Marquez.

    Workforce Management: What three initiatives that you have worked on this year are you most proud of?

    Sue Oliver: First is our new human resources organization. A year ago we had no more than 100 field human resources managers who all worked from Bentonville. We were more centralized in terms of HR support and we did not have enough HR support in the field. Over the last six months, we have created five divisional HR leaders, 27 regional HR directors and 342 field HR managers. A number of those positions have been filled with people who were willing to move from Bentonville or from the stores, and half of the field positions were external hires.

    The second thing I’m proud of is how the restructuring of the field operations supports the operations. For each region now, there is a regional general manager, who is an officer of Wal-Mart, and then five to six people from different business units, including HR.

“Our business strategies won’t be successful if we don’t have the right talent, and the only way to do that is to make sure that HR is more integrated.”

    The third initiative stems from the first two, in that now we have HR strategies integrated with the business strategies. Now, human resources leaders can take our business strategies that are unique to their geographical areas and translate them into human resources strategies.

    WM: Can you give an example of that?

    Oliver: For example, in the Northeast there is a business strategy of growing a number of supercenters and neighborhood markets. Therefore, we need talent to staff them. That means the HR support members will look at the people and ensure that the business strategy won’t be compromised. That strategy integration is different than what we had in the past.

    WM: What prompted Wal-Mart to reorganize its HR operations?

    Oliver: As we think about the three- to five-year time horizon, we know we have to be having the right talent to secure our future. Our business strategies won’t be successful if we don’t have the right talent, and the only way to do that is to make sure that HR is more integrated.

    In the past, we were more focused on the basics, of making certain that the operations were running as they should. Now we are looking at longer horizons than we have focused on in the past, and with that comes a different type of HR professional.

    WM: When we met a year ago, you said your goal was to reduce associate turnover by 10 percent. Have you achieved that goal?

    Oliver: We are still very focused on that. Turnover is better than it was a year ago, but our goal is to make certain that we have the right processes in place so that whatever improvements we see, we will continue to see. We don’t want this to be a temporary improvement. So that means we need to make certain that we are hiring appropriately. New associates need to be made to feel comfortable with their work environment and get training and that they are not put in front of customers before they are ready.

    If we can get associates past the first 90 days to six months, most of the battle has been won. Another big piece to this is having our associates quickly understand that the position they are entering with Wal-Mart is one of many personal growth opportunities we have.

    WM: Some of your critics would say if Wal-Mart paid better compensation and benefits, that you would have an easier job of attracting and retaining talent. How do you respond to that?

    Oliver: We are doing a good job of addressing both compensation and benefits. We want to be an employer of choice, and to do that you need to be market-competitive with wages, whether the workers are hourly or in management. For our hourly associates we have an annual review process where we take an outside vendor, like Hewitt Associates or the Hay Group or other compensation firms. They help us analyze by market and by store whether or not our start rates are market-competitive.

“It became clear that we needed to share the facts, and that’s why today you can go to our Web site and read about up-to-date issues and controversial issues.”

    We are very focused on that, and we believe the best indicator of that is what people do in response. If you look at one of our newest stores in Evergreen Park, near Chicago, we got 25,000 applications for 325 positions.

    WM: In a recent internal memo, Wal-Mart CEO Lee Scott warned managers against cutting corners. What is Wal-Mart doing to be tougher on managers who cut corners or break the law?

    Oliver: We do have situations where there may be a manager who has acted inappropriately. In my tenure, I have found that it is a very small number. But most importantly, when those situations arise, Wal-Mart makes no compromises. We are very resolute that all of our people are held to the same standards.

    We also have a number of hot lines for employees. We have an ethics hot line that an associate can call anonymously if they prefer to handle it in that manner. We have staff that promptly investigates anything. We have an open-door policy. Our associates do not hesitate to raise issues. And while they can raise issues to a manager, they can also go to the senior management if they feel more comfortable at that level.

    WM: There have been reports about Wal-Mart hiring political public relations experts to help with its communications strategy. Why has Wal-Mart suddenly this year become so much more proactive on the public relations front?

    Oliver: What we have found ourselves doing is making certain that the facts are out there and that we are telling our story. It became clear that we needed to share the facts, and that’s why today you can go on our Web site and read about up-to-date issues and controversial issues. We will include what we think is going to be a sensitive issue. Our senior management has also made it a point to speak out more and make certain that people know what we are doing. We will always want to improve, but there are many wonderful things we are doing. Our associates have said to us, “You can’t stay quiet; you have to speak up.”

    WM: Some of your critics might view all of the changes you have made in the past year as a victory for them. What is your response to that?

    Oliver: We are a growing company. That means from an HR perspective, we need to think about where that talent is going to come from, whether it’s a necessary focus on developing our own associates or whether it’s attracting new talent. We want to get the right associates and we want to make sure that associates want to stay with us in the long term.

    WM: What is your biggest challenge today?

    Oliver: Our biggest challenge is meeting our growth needs around talent in the future. I think if I had a second-biggest challenge, it would be the fact that it’s always a daunting challenge to be able to have our associates understand all of the good things we’re offering them. When you have 1.3 million [U.S.] associates, it’s daunting. I believe that having teams out in the markets will help us immensely and that we will be able to communicate more quickly.

Workforce Management, August 14, 2006, pp. 28-32 — Subscribe Now!

Steve Mejia really thought it could work. At a meeting in late 2004, Mejia, senior manager of information systems at Nissan Motor, and his staff started discussing how much money the company could save if some of the automaker’s employees could work from home.

    The technology was advanced enough and it could particularly help employees who spent much of their time traveling.

    At companies as big as Nissan, which has 183,000 employees worldwide, such ideas can easily fall through the cracks. But Nissan president and CEO Carlos Ghosn made sure that wouldn’t happen.

    In the increasingly competitive automobile industry, companies are trying to stay ahead of the competition by speeding the innovation cycle. This requires a workforce model that lets ideas make their way through the organization quickly, says Arthur Wheaton, workplace and industry education specialist at Cornell University.

    “This means companies need to remove layers of management and make sure that good ideas are being heard and coming to fruition,” Wheaton says.

    Ghosn made this his top priority when he took over as chairman of Nissan’s U.S. management committee in 2004. In Japan, Nissan’s cross-functional teams were key in making sure that the company continued to come up with new ways to solve problems quickly and do things efficiently. Ghosn wanted that to happen in the U.S.

    Nissan established 16 teams, each with eight to 15 salaried employees from various departments. The idea was to focus on specific issues, such as quality, diversity or supply-chain management. Teams meet weekly or biweekly and often break into subgroups to address the problems and issues they identify.

    The participants, who serve on a team for no more than two years, are selected by managers or human resources staff as being high performers. They’re employees who have demonstrated that they can embrace and enforce new ideas, says Tricia Springer, sales operation manager for the South Central region, who helped oversee the creation of the teams.

    “The cross-functional teams are in place to challenge the organization and propose stretch initiatives and opportunities for us to be more creative and innovative,” she says.

    Mejia, for instance, took his idea for the virtual office to colleagues on his cross-functional team. The team designated a subgroup of employees from human resources, finance, information systems, sales, operations and facilities to come up with a proposal on the telecommuting concept. The group presented the idea to Ghosn in April 2005.

    He liked it. With Ghosn’s approval, Mejia and his team conducted a four-month pilot with 41 employees. The pilot found that in addition to reducing operations costs and improving morale, participants’ productivity increased by 23 percent.

    Nissan is implementing the virtual office initiative as it relocates its headquarters from Los Angeles to Nashville, Tennessee, this summer. The company’s 14 trend spotters, who analyze market trends and identify concepts for Nissan, will work from home in Los Angeles.

    Nissan’s ability to allow ideas like the virtual office initiative to come to fruition demonstrates how the company understands the necessity to change constantly, analysts say.

    “We see this as key to staying ahead of our competitors,” Springer says.

Workforce Management, July 17, 2006, p. 28 — Subscribe Now!

It’s a Thursday morning in early April, and the Global Engine Manufacturing Alliance plant in Dundee, Michigan, is open as it always is, 21 hours a day, six days a week, 294 days a year.

    But a visitor to the plant might wonder where all the workers are.

    True, for an auto engine plant, GEMA is more automated and thus leaner than most. The facility’s total headcount is 275, significantly less than a typical engine plant, which has 600 to 2,000 workers.

    But that’s not why the assembly lines seem empty, GEMA president Bruce Coventry says. “Since we’re ahead of schedule, a lot of our people are in training,” he says.

    Sure enough, down the hall are three rooms filled with employees being taught a wide array of subjects, ranging from how to assemble an engine to the study of mathematical formulas designed to teach problem-solving skills.

    Over the next several months, these employees will receive up to 1,160 hours of such training in class and on the assembly floor.

    “The fact that we are ahead of our production schedule allows us to focus our people on problem solving and continuous improvement,” Coventry says. “That’s a luxury that most organizations don’t usually have.”

    And that’s why automakers from around the world, including GEMA’s three owners—DaimlerChrysler, Mitsubishi and Hyundai—are keeping close track of this facility, located 60 miles outside of Detroit.

    As General Motors and Ford seek to shed thousands of their union-represented employees, they are looking ahead to what kind of workforce they will need to compete in the increasingly global market.

    “They need a new business model for labor agreements and new kinds of workers,” says Sean McAlinden, chief economist and vice president of research at the Center for Automotive Research in Ann Arbor, Michigan.

    Many are thinking that GEMA may prove to be that model, he says.

    The Dundee facility, which opened in October, stands out from other auto plants in every aspect of how it manages its workforce. Its hourly employees are highly educated and rotate jobs and shifts to provide for greater flexibility. That’s an unheard of concept in the traditional auto plant, where each worker is usually assigned to one and only one job.

    Another unique aspect of GEMA’s workforce model is that contractors, whom the plant refers to as “partners,” work alongside assembly workers and engineers, sporting the same black-and-white uniforms. “We want everyone to feel like they are part of a team,” Coventry says.

    But the most unheard of thing for the auto industry is that the United Auto Workers has agreed to the concept.

    “This is an agreement that every automaker is looking at with laser eyes,” McAlinden says.

    GEMA expects to open a second facility in October on the same premises. At full capacity the Dundee plants will have 532 workers and produce 840,000 engines annually. Its goal is to be the most productive engine plant in the world, beating the industry standard of 1.8 hours of production per engine, says Mark Dunning, senior manager of human resources. The company says that so far GEMA is on track to hit those numbers, though it will not disclose preliminary data.

    The initial investment for the two plants was $804 million, 50 percent less than DaimlerChrysler had ever invested in an engine plant, Coventry says.

    The automakers’ joint venture also has two non-GEMA plants in South Korea and one in Japan that produce engines for Hyundai and Mitsubishi, respectively. When all of the plants are operational by year’s end, the venture will have the capacity to produce 1.8 million engines annually.

GEMA’s origin
    Coventry, who had been an engine plant manager for Chrysler since 1995, was the logical choice to come up with the idea for GEMA in 2001. Chrysler had recently bought a stake in Hyundai and Mitsubishi, and Thomas LaSorda, then head of DaimlerChrysler’s engine and transmission division, wanted to come up with ways for the three companies to collaborate.

    All three organizations needed four-cylinder engines. Coventry was LaSorda’s pick to help lead the project.

    A graduate of General Motors Institute, an engineering school established by General Motors and now called Kettering University, Coventry wanted to find a way to get rid of the waste and inefficiencies he had seen in traditional plants.

    “My pet peeves are bureaucracy, structure and management,” he says.

    Over the next several months, Coventry and a team of executives from the three automakers brainstormed over meetings in Korea and the U.S.

    During these discussions, the group came up with a list of companies within and outside of the industry, such as Dell, Wal-Mart and Toyota, to serve as benchmarks for the business model they wanted.

Like its Japanese peers, the alliance wanted to focus on kaizen, the Japanese term for continuous improvement. But Coventry says that GEMA doesn’t want to just replicate Toyota, which he concedes is “the rabbit” all automakers are trying to catch.

    “We are doing many things that a Toyota employee would recognize, but the big differentiator is that our workforce has a much higher level of technical skill,” he says.

    GEMA’s nonexempt workers, who start at $21 an hour and work up to $30 within five years, must have either a two-year technical degree, a skilled journeyman’s card or five years’ experience in advanced machining. This level of education is key to GEMA being more flexible, and thus faster than its competitors, Dunning says.

    The other guiding principles of the plant’s culture are problem solving and “the four A’s”: anyone can do anything anytime, anywhere. This means that workers rotate jobs—a model that is designed to give the plant more flexibility. Everyone on the floor has a similar title: They are “team members” and “team leaders.”
 

“Creating a plant around the concepts of flexibility and problem solving really comes down to the people we hire.” –Bruce Coventry

    By rotating jobs, the plant hopes to keep workers engaged and reduce the potential for injury, Coventry says. The chance of workers developing ergonomic injuries is lower if they aren’t repeating the exact same motions all day long, he says. So far there have been no ergonomical injuries at the plant.

    There are also no foremen overseeing the workers at GEMA. In their place are the team leaders. In contrast to foremen, the team leaders don’t stand on the sidelines observing how the teams work. They work alongside six-person groups, each one including an engineer.

    Coventry bristles if he sees engineers at their desks while he’s walking through the plant. “Having engineers on the floor enables us to solve problems right away when they happen,” he says.

    The shift structure is also different. Most auto plants have two shifts: a day and night shift, five days a week. The more senior workers usually get first pick, which means they work days, while younger employees work nights.

    At GEMA, workers rotate shifts in crews of three, allowing the plant to have nearly continuous operation—21 hours a day, 6 days a week, 294 days of the year—while employees work only 196 days a year.

    Under this schedule, hourly employees work 10 hours a day, four days a week, alternating between days and nights. Every third week of their rotation, they get five consecutive days off, on top of vacation time. The day shift is 6 a.m. to 4:30 p.m., and the night shift is 4:30 p.m. to 3 a.m., which includes an unpaid half-hour break and two 12-minute breaks.

    The trade-off is that workers have to reset their body clocks to alternate between working days and nights in 10-hour stretches, instead of the usual eight-hour shifts.

    “But that allows our workers to come in 49 days less than at a traditional plant,” Coventry says, noting that at most auto plants, workers come in 245 days a year.

    “Those are days that they don’t have to spend on child care or drive on $3-a-gallon gas.”

    Very few companies have workers alternating between days and nights because it can be tough, particularly for older workers, to shift their sleeping patterns, says Acacia Aguirre, medical director at Circadian Technologies, an international consulting firm that helps companies with shift work. But if workers can be in bed by 3:30 or 4 a.m., it’s not that bad. They can still go to sleep while it’s dark outside and will probably sleep until 8 or 9 a.m., she says.

    However, workers who have to travel long distances to get home should be careful because the hours between 3 a.m. and 5 a.m. are when people are the least alert, Aguirre says.

Getting union buy-in
    Bringing a new concept to the table is never easy in labor relations, but GEMA’s management was ready to spend as much time as needed explaining the benefits of the workforce model. The UAW initially was concerned about the “four A’s” concept, says Bruce Baumbach, the GEMA plant manager who helped oversee the negotiations.

    “Their concern was that it would give management the ability to pull out anybody, anytime,” he says.

    Baumbach explained to the union leaders that the idea was to have a flexible model and that it would encompass all positions, including managers.

    GEMA management also had to spend a lot of time making union leaders comfortable with the shift structure.

    “They felt that people should be able to decide what shifts they hold,” Baumbach says.

    But the reason for the alternate shifts wasn’t just to increase productivity. It was also cultural, Baumbach says. By having alternating shifts, GEMA wanted to give workers the opportunity to know and work with one another and with salaried employees, who are only in during the daytime.

    “Especially since the management team is mostly in on days, we want all of our people to be able to experience working with them,” Baumbach says. “The union understood that.”

But the union was also concerned about how its members would adapt to working days some weeks and nights during others. To address this, GEMA developed a counseling session to give new employees tips on how to adjust their internal clocks to the changes, Dunning says.

    The UAW signed an agreement that lasts until 2011.

    “The UAW leadership understands the competitive situation that we are in,” Coventry says. “None of us are happy about it, but they are realistic. The only reason they support this is because they believe it will allow us to be here in 40 years.”

    UAW officials didn’t return calls seeking comment.

Creating a culture
    Getting the right people in the door was the next challenge. “Creating a plant around the concepts of flexibility and problem solving really comes down to the people we hire,” Coventry says.

    GEMA placed ads in local newspapers and online and reached out to various organizations within a 75-mile radius of Dundee, Dunning says. For example, GEMA worked with Focus: Hope, a Detroit civil rights organization that promotes diversity and also has a machining technology institute.

The time and money spent of finding good employees are GEMA are considerable, but so is the payoff in terms of workforce creativity. “The amount of time from problem to solution is shorter than I have ever seen it in my 17 years at Chrysler.” –Mark Dunning, senior manager of human resources

    “They helped us identify diverse prospects with good technical and collaborative skills,” Dunning says.

    Applicants to GEMA have to go through a grueling screening process that can take up to 12 hours. Only one in five candidates are accepted.

    The process, which was developed with the help of Development Dimensions International, a Pittsburgh-based leadership development consultancy, requires candidates to take two one-hour exams designed to determine whether they are a good fit for GEMA’s team-based environment.

    Applicants who score well are asked to take a four-hour interactive assessment, where they are evaluated as individuals and as members of teams. The assessments are meant to evaluate how they would handle hypothetical challenges facing the plant. For example, if a certain process within the plant wasn’t running efficiently, applicants would be asked to work as a team to figure out how to address the situation.

    “We want to see not just that they are offering up ideas, but that they were open to others’ ideas,” Dunning says.

    The final step is an interview with the operations managers and floor leaders, during which candidates are again asked about how they would handle different types of situations.

    The process costs “in the four figures” per hire, Dunning says. So far, he believes the investment has been worth it.

    “The amount of time from problem to solution is shorter than I have ever seen it in my 17 years at Chrysler,” he says.

    GEMA’s hourly hires are mostly people from small and midsized auto supply shops who are accustomed to taking on several roles at once and solving problems quickly, Dunning says.

    The company has also hired five machinists from North­west Airlines and 12 graduates of Monroe Community College, which is just 14 miles away from the plant.

    The culture of problem solving is evident when walking around the plant. White boards listing issues that need attention are positioned in different corners of the plant floor. Each board shows a chart of when the problem was identified, the status of it and who is working on it.

    Giant electronic screens resembling scoreboards in a sports arena keep a running tab of productivity. These boards, which hang from the ceiling of the plant, indicate in red any machinery parts that are ending their run time and need to be replaced. Most parts don’t last indefinitely, and the boards alert workers so that they can replace them before they malfunction.

    GEMA also has a performance management system that alerts workers to delays or breakdowns in productivity. This information is Web-based and available on computers as well as on a display board in the plant, says Dennis Cocco, president and founder of Activplant, the provider of the performance management system.

    In most plants, he says, only foremen have access to this information, but at GEMA everyone can see where a problem occurs.

    “This supports the culture of empowerment that defines GEMA,” Cocco says. “It makes everyone more focused on fixing the problem.”

To reward problem solvers, GEMA has a recognition program. Peers can reward one another, and managers can reward teams or individuals. Rewards range from a pizza lunch to American Express gift certificates.

    GEMA also is developing a bonus program for employees who come up with innovative solutions to problems. Such incentive pay is almost unheard of at traditional auto plants.

    “Bonuses will be based on meeting specific performance metrics,” Dunning says.

    But the real motivation for workers to be innovative is that it makes their jobs easier, Coventry says. And analysts say he isn’t being trite.

    “In the auto industry, the best motivator you can give workers today is job security,” McAlinden says.

Hurdles
    The question remains whether GEMA’s workforce model is replicable. It’s one thing to build a plant from scratch, but it’s a completely different challenge to apply this model to an existing plant, where workers are already accustomed to doing things a certain way, analysts say.

    There is also the concern about whether workers will be able to alternate between day and night shifts on a long-term basis. So far, GEMA’s employees seem to be adjusting. The plant’s turnover is 7 percent, slightly higher than the 5 percent industry average. Its absenteeism rate is 1.1 percent, including vacation and bereavement leave. That is significantly lower than the 14 percent industry average.

    The biggest hurdle for GEMA, though, may be persuading the local UAW chapters throughout the country to accept this new way of doing things.

DaimlerChrysler, for one, is convinced this is the way to go, and it is implementing the GEMA model in new and existing plants as contracts come up for renewal, says Ed Saenz, a DaimlerChrysler spokes­man.

    In April, the automaker signed agreements to use the GEMA model at plants in Ke­nosha, Wisconsin, and Trenton, Michigan.

    “It’s a question of survival,” says Bruce Baumhower, president of UAW Local 12 in Toledo, Ohio. He has negotiated for a job classification structure and team approach similar to GEMA’s at a DaimlerChrysler Jeep plant. “To compete, we need to be creative, or we lose our jobs.”

Workforce Management, July 17, 2006, p. 1, 20-30 — Subscribe Now!

Jeremy Farmer had his work cut out for him when he joined Aon in April 2003 as senior vice president and head of human resources. With 47,000 employees in 500 offices throughout the world, the insurance and consulting company was completely decentralized.

    Aon had been growing through mergers and acquisitions for 20 years, and it was Farmer’s job to bring all of these different businesses together into one culture while maintaining the entrepreneurial mind-set that characterized each unit.

    The company had talent. Lots of it. But because it was so decentralized, upper management had no way of knowing who they should be grooming to be the future leaders. Compensation programs varied for each business line and location. Creating an “Aon culture” would mean building a performance management system and compensation program for the entire organization.

    Farmer, a U.K. native who has worked in financial services for the past 25 years, says he was up to the challenge. With a graduate degree in human resources and industrial relations from the University of Aston in Birmingham, England, he moved to the U.S. 22 years ago to work for First Chicago Bank, now Bank One.

    But just a few months after Farmer started at Aon, New York Attorney General Eliot Spitzer subpoenaed the company as part of a sweep of the insurance brokerage industry. Spitzer was investigating the company and its competitors to find out whether they were steering business to favored insurers in exchange for contingent commissions, which is incentive pay that rewards brokers for hitting volume and profit targets.

    In March 2005, Aon reached a $190 million settlement with five regulatory agencies in three states. While the company did not admit any wrongdoing or liability under the agreement, Farmer says the investigation highlighted the business need for Aon to create a culture founded on the singular goal of putting clients first.

    Today, Aon’s walls are covered with posters trumpeting the company’s various achievements, including raising $2 million for tsunami victims. And they tout the company’s values—integrity and teamwork. They’re a reminder that the company is trying to put its days of fragmented cultures and different goals behind it.

    Farmer recently spoke to Workforce Management staff writer Jessica Marquez.

    Workforce Management: What are the inherent workforce management challenges in the financial services industry?

    Jeremy Farmer: In professional services companies like Aon, there is quite a star culture. The focus on attracting and retaining talent is crucial because you are selling a service, not a product. So there is a tremendous emphasis on trying to keep the best and brightest engaged and motivated.

    It’s challenging to be able to capture their creativity and do that in a way that enables you to make a decent profit along the way. So then the challenge is in designing compensation programs that reward true stars, but also allow companies to be successful in maintaining adequate reward for shareholders.

    WM: Couldn’t there be dangerous side effects to creating a star culture?

    Farmer: Not if it is perceived to be based on performance. If you have a culture where there is a sense of entitlement, where employees think that regardless of how they are doing that they will still get paid, that starts a slippery slope. That focus on paying for performance is fine as long as you are able to do that objectively, and that’s really the culture that we are trying to build at Aon.

    WM: How is Aon creating a performance-focused culture?

    Farmer: Three years ago, it was somewhat lucky if an employee had a performance review. Some managers did it, but there was no discipline to it. Now, we have established a five-point rating system that is used globally.

    We tell all managers that we expect to see less than 10 percent of their population be star performers, or 5s (on a five-point rating scale); 20 percent in the 4 category; 50 percent in the 3s and 10 to 20 percent in the 2s and 1s. Although I kind of wonder if we need a 1 category, since these people are probably not in the right job. These percentages are guidelines, not mandates, because we want our managers to have some flexibility.

    Next year we will introduce an online element to this so we can see how the ratings fall throughout our employee population. For example, if there are a lot of 4- and 5-rated employees working for a 3-rated manager, we can examine that and see if there is greater turnover as opposed to a manager who is rated a star performer.

    The system also will identify people interested in moving so that we can see which star performers are willing to switch business lines or locations.

    WM: How are you revamping compensation to support this focus on performance?

    Farmer: Previously each business unit and geographic unit had its own compensation program that was based on the performance of that area. This meant that there was no driver for a broker in one business unit to sell a product from another, for example. We wanted to align the compensation system to incent employees to bring the whole of Aon to their customers.

    In January 2004, we introduced a pro-gram by which employees’ compensation is partially based on their business unit’s performance, partially on their geographic area’s performance and partially on Aon’s business results as a whole. The breakdown will vary for different employees at different levels.

    To do this with the top senior-most executives, we decided to focus more on equity rather than cash. We created a program so that the equity senior managers receive over time will be based on how Aon performs over a three-year period. If certain earnings-per-share targets are achieved, they will receive performance-based shares. But if those targets aren’t met, they won’t.

    For managers one level down, we offer more restricted shares, which have a retentive element, and then a portion of equity that will only be worth something if the company’s overall performance is up compared to a certain metric. That metric is not as directly linked to earnings per share, but it’s similar.

    WM: Aon has offices in 120 countries and sovereignties. How do you take into account the different cultural nuances when you are creating a compensation system?

    Farmer: Obviously the base salary levels and the benefits are going to be different from country to country. Some countries will have higher social benefits at less cost, and some countries will have higher leverage in incentive compensation as a percentage of base salary.

    We take all these things into account. But we have a global philosophy that says whatever you do, we want that target to be above market. We give managers some discretion. And we rely on our local human resources teams to take our overall philosophy around compensation and drive it in where it makes sense.

    WM: Once you identify top performers, how do you make them feel part of this culture?

    Farmer: We are focusing on bringing these employees together and getting them interacting. Last year we started a four-day program with the Kellogg School of Management at Northwestern University. We bring together 70 senior executives from around the world to talk about the great problems of the day. Some of the talks are driven by Aon, and some are more academically driven.

    For midlevel managers we have a similar program, called Catalyst. This is a yearlong program that includes several sessions and 360 (degree) feedback, with the idea of grooming these employees to be senior leaders.

    These programs not only give managers the opportunity to talk with each other and with senior executives, but they also get some sort of intellectual growth. These meetings help to breed a common culture while encouraging strong performers to stay.

    WM: How do you get employees who are not top performers to feel part of this culture?

    Farmer: That’s important, because there are people who show up every day but might not want to be leaders at the company. To get them thinking about companywide performance, in 2004 we began offering an additional 401(k) match if the company does well. This creates a line of sight for these employees.

    The additional match is determined by Aon’s board each year. This year, Aon did a 2 percent additional match, contributing nearly $15 million more to those making full contributions to the 401(k). We have 15,400 participants.

    The other way we do this is through communications. Our CEO, Gregory Case, who came on board in April 2005, is a tremendous communicator. We have estimated that through webcasts and face-to-face meetings, he has touched about 15,000 to 20,000 employees.

    Often when groups of college recruits come in for their second interviews, he will come down and chat with them about it. New hires go through a Web-based orientation program to give them a sense of what Aon is about and its history.

    WM: What did Spitzer’s investigation highlight that needed to be changed about Aon’s culture?

    Farmer: While Aon was never accused of any wrongdoing, the attorney general was concerned that accepting contingent commissions was not appropriate. We agreed and stopped that practice. But in terms of culture, the investigation reinforced how important it was for us to think of our customers.

    WM: What did Aon do to make sure its employees were doing that?

    Farmer: We have a fair number of employees in sales who have historically been paid based on the first year of revenue of a transaction. We are moving away from that model in favor of rewarding employees based on profit. Now salespeople are getting rewarded out of a pool determined by the profit of the company rather than just getting a commission off of the transaction.

    For those employees where it makes sense to continue to pay them based on revenue, we are looking to do it in a way that is broader than just based on the transaction. We are looking at spreading those employees’ stream of income over the span of the relationship with a client. For example, they may get paid in three-year periods.

    What we are trying to do is to emphasize that it’s not about grabbing the juiciest apple on the tree. Again, we are trying to align our compensation with the kinds of behavior we want in our workplace.

    WM: What metrics are you using to gauge your success?

    Farmer: There are some objective measures, but I don’t think it’s all about objective measures. We look at turn-over. Currently, senior-level attrition is less than 10 percent, which we are happy with. We are looking at what kind of recruits we get. And most importantly, we look at employee feedback.

    Right now we are discussing whether to do one big global survey of employees or several smaller ones. What you don’t want to do is create a huge process so you get 15,000 surveys back that all have to be analyzed. You end up with something unwieldy that is hard to make an action plan around.

Workforce Management, June 12, 2006, p. 32-36 — Subscribe Now!